California to Polluters: Go Green or Pay Up

California to Polluters: Go Green or Pay Up

"Cap and trade" may be a dirty expression inside the DC Beltway, but as of today in California it's the law of the land. Gov. Jerry Brown has brushed aside dire warnings from the fossil fuel industry to forge ahead with the state's first-ever auction of emissions permits under its groundbreaking climate law, AB 32. This morning's auction marks the official launch of the world's second-largest carbon market.

At heart, the concept is elegantly simple. Suppose you wanted to persuade a group of 10 pack-a-day smokers to cut back, and you controlled the cigarette supply. In the beginning, you'd provide the group with 200 cigarettes (10 packs) a day, which they'd have to bid for. That's the "cap." Then, each month, you would reduce each person's daily allottment of smokes, gradually lowering the cap. The people who managed to smoke less could sell their extras to the more hard-core smokers for whatever they were willing to pay. That's the "trade" part.